INCOME TAXATION BY INSTALMENTS

Dominion, Volume 37, Issue 117, 12 February 1944, Page 5

INCOME TAXATION BY INSTALMENTS

“Pay-As-You-Earn” System EXPLANATION OF BRITISH METHOD The method adopted by the Treasury to apply the “pay-as-you-earu” income tax system now operating in Great Britain was outlined in a White Paper presented to Parliament and published on September 22 by H.M. Stationery Office. The weekly deduction of tax is adjusted to any rise or foil of wages and at the same time the weekly deductions are related to the final liability of tax on the aggregate wages over the whole year. Provision is also made whereby, iu the event of a fall in wages, or temporary cessation, and a position arising where the tax already deducted for the fiscal vear exceeds what should have been paid, the employer forthwith repays .the excess. The system applies not only to ail wage-earners employed by way of manual labour, but also to all other wageearners whose wages are calculated weekly. It does not apply to those classes whose taxes are deductible under certain provisions of previous Income Tax Acts —-e.g., civil servants and railway officials, to whom special arrangements for deductions of taxes already apply. Method of Computation.

There will be ascertained at the end of every week the amount of tax due from the wage-earner on the total amount of wages paid in the linancia* year to date, the calculation taking into consideration the appropriate proportional part of the taxpayer’s abatements for the whole year on account of family responsibilities. ’ . The amount of tax deducted in any one week is, (a) the tax due on the aggregate wages up to aud including that week, less.(b) the tax already deducted in the previous weeks of the year. Thus, at the end of the first week the tax deducted is tax on the basis of allowing against the week’s wages one fifty-second of the abatements for toe year; at the end of the second week the tax deducted is the excess of (a), the tax on the aggregate wages for the two weeks allowing against those wages two fifty-seconds of the abatements for the year, over (b) the tax already deducted for the first week. The latter method is used for all succeeding weeks of the year. The factor governing each week’s deduction is therefore the liability on the aggregate earnings for the year to the date of the particular computation, termed the “cumulative tax.” The deduction in auv week is therefore the “cumulative tax” less the total deducted m previous weeks of the year. Thus deductions keep pace with accruing liability,, and excessive deductions because of fluctuating earnings are avoided. In the ease of fluctuating wages the system tends to level the weekly tax payments, arid the net wages received each week are also levelled, because in weeks of high pay the tax deduction becomes higher, and in weeks of low pay it falls, and may even reach the stage of tax repayment already mentioned. If a wage-earner is away from work because of sickness and receives no pay, he is not faced with a heavier tax deduction on return to work, but usually finds himself entitled to an immediate repayment because the “cumulative tax” up to the end of the week he returns to work is less than the tax deducted before he went sick. Employers’ Duties. The system does not involve elaborate calculations by employers. Each wageearner io given a code number by the Inland Revenue in accordance with the allowances and abatements due to him, and this is notified to the employer. The employer is also supplied with tax tables which show for each code number the “cumulative tax” on any given amount of wages up to the end of each week of ,the year. Iu dealing with auy particular week the employer finds in the tables, under the code number applicable to the employee, the “cumulative tax” up to the end of that week on the amount of thA. employee’s aggregate, wages to date. He will then deduct, or refund, the difference between the “cumulative tax” to the end of that week and the aggregate tax deducted in previous weeks, and will record on a tax deduction card, supplied for the particular wage-earner, the particulars of the week’s transaction, .■ Employee’s Check,

The employee has an opportunity of satisfying'himself that his code numbering is correct before the deductions start. Inland Revenue supplies to him in advance the number and the abatements, etc., bv which it has been arrived at, and he has the opportunity of querying the numbering if be thinks it inaccurate. Copies of the deduction tables supplied to employers are available to employees so that they can check the weekly deductions. - The tax collected by employers is paid over monthly to the Collector of Taxes. Where small, they may be made quarterly. At the end of each year the employer will give each employee a certificate of tax deducted and will send to the collector all tbe tax deduction cards. The collector will send to the wage-earner a notice of assessment for the past year, showing the tax due-, the amount deducted by the employer, and the manner in which any over-deduction or under-deduction will lie dealt with. For the purpose of this assessment, arid to enable adjustments or recoding where personal circumstances alter, the wage-earner will make the usual return and claim for allowances. If, after deductions bave A begun, the wage-earner’s circumstances alter so as to increase the amount of allowances to which he is entitled, effect will be given to the alteration as soon as the Inspector of Taxes is notified of tbe change by the wage-earner. Small amounts of interest which may be received by wage-earners from other sources than employment will be taken into consideration by adjustments of codings, and the settlements of outstanding balances due to the Inland Revenue because of under-deductions .will also be ejlected by this method.' A similar course will' be adopted to adjust over-pay-ments, unless the employee desires immediate repayment. Change of Employment.

On a change of employment the old employer will notify the Inland Revenue and will give to the employee a certificate of wages paid and tax deducted in the tax year to date. This will be handed by the employee to the new employer, who will open a new tax deduction card and continue to operate as if the employment has been continuous. If an employee does not wish to disclose to his new employer the total wages-received and the total tax paid in his former employment, he can arrange with lulaud Revenue for provisional deductions to be made which will not disclose this information. . 1 The deduction of tax from the earnings of married women in employment is a special and difficult problem. The continuation of the principle of income-tax that the income of husband and wife are treated as one is considered important, for to treat them separately would, in most cases, increase the payable tax iu the ease of small incomes. Where husband and wife are employed, they are coded normally on the basis of allotting to the wife the special allowance of £BO to which she is entitled, giving the married and other personal allowances primarily to the husband. In some cases it may be found that too little tax has in, aggregate been deducted, but this will be unavoidable. Any under-deduction will lie adjusted by fixing the coding for the subsequent year to take into account the outstanding amount. The system came into force for clerks, typists, and similar workers, on November 1 last, nnd manual workers will be brought in on February 1 next.